How Kids Become Parents` Landlords

Older people who want to move to Florida without locking up their money in home equity can use their children to enjoy a permanent home with a monthly income.

The program, introduced by the private Family Backed Mortgage Association Inc. in Oakland, Calif., and called SMILE (sell-move-lease), is a spinoff of the reverse annuity mortgage program that has been ignored by the banking industry since its inception in 1979.

Both mortgages allow older couples to sell their homes and receive a monthly income from an annuity. While the reverse annuity runs out according to a recipient`s life expectancy, based on insurance actuarial tables, the FBMA program calls for guaranteed monthly payments until death.

``We decided to set up a program that would keep the home in the family, guarantee that monthly income for life and guarantee your occupancy in the home for life,`` said Ida Abelson, FBMA vice president of mortgage origination.

Say the homeowner is 59, lives in International Falls, Minn., and wants to move to Lantana. Other than transportation and a summer wardrobe, he has two needs: a place to live and some extra spending money. If he sells the $100,000 house he owns free and clear in Minnesota, he could use the money to buy another in Florida, but it wouldn`t satisfy his need for additional income. Having paid off one mortgage, he might be disinclined to take on another at his age.

FBMA would say his solution lies in the SMILE program. Here, the homeowner sells his $100,000 house and puts most of the money into an annuity held by Transamerica Occidental Life. Meanwhile, the homeowner`s daughter and son-in-law borrow enough from a lender to buy a small $50,000 house in Lantana. They rent the house to the father.

In a scenario created by FBMA, the retired father would sell the $100,000 house tax-free and invest the proceeds in an annuity paying $1,081 a month for life. Transamerica/Occidental would send one check, for $250, to the children to cover the rent; the rest goes directly to the father.

Such an arrangement would be attractive to the retired father because he has a home, supplemental cash and low rent and he wouldn`t be responsible for real estate taxes, insurance and upkeep, FBMA says. At the same time, FBMA maintains that the children could experience a positive cash flow in the first few years.

``Typically, when someone in his retirement years wants to move to the Sun Belt - and Florida is certainly part of that - he sells the old homestead and takes whatever cash he gets out of it and puts it into a new residence,`` said FBMA Marketing Vice President Susan Vernon. ``That`s not the smartest thing to do. They should take some of that money and apply it to the enjoyment of their retirement years.``

Unlike the ordinary reverse annuity mortgage, which provides for monthly income for the remaining years of one`s life expectancy, the SMILE program offers income that is guaranteed by the insurance company, Vernon said. Moreover, the Federal Home Loan Mortgage Corp., or Freddie Mac, and the investment brokerage Drexel, Burnham, Lambert of New York, have agreed to buy the loans that the children obtain to purchase the house, Vernon said.

FBMA, which was incorporated in November 1983, doesn`t provide any financing, just legal documents and explanations for a $750 fee. The company has no Florida agents, but has a toll-free number (1-800-323-3262) for people interested in the program.

Another program offered by FBMA, called the Golden Retirement Annuities Mortgage or Grannie Mae, has only found two individual takers in the year that it has been available.

Grannie Mae is more similar to the ordinary reverse annuity mortgage in that homeowners remain in their current homes. The principal feature is that the parents sell the home to their children, put at least 80 percent of the money into a Grannie Mae annuity, then lease the home from the children. Again, the monthly income payments from Transamerica Occidental are guaranteed for life.

Abelson explained that rent payments in both the Grannie Mae and Smile programs are mailed directly from the annuity custodian to the children, that way late payments can`t create family strains.

``What are you going to do if they`re late, break their kneecaps?`` she said. ``But probably the children will say, `Aw, we`ll let it slide until after Christmas.` But the minute you do that, you put a big red stamp on your back that says, `Audit me.` ``

Banks and savings and loan associations were never enthralled with the reverse annuity mortgages designed for older homeowners. ``Someone who`s looking for a reverse annuity mortgage will have to look very hard to find one,`` said Allen Friedman of the U.S. League of Savings Institutions in Chicago. ``I don`t know if there are any lenders down there (in Florida) offering it or not.``